Dennis Leone to Damon Asbury: Two Questions

To Jim Kimmel and Nancy Hamant, July 29, 2006
Subject: Fw: Questions Posed

James and Nancy -- For your review and comment.

Dennis Leone
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To Judi Peaspanen, July 29, 2006

Here is a response I received to 2 recent questions posed to Damon Asbury. It is best to read my questions first, which are shown at the very bottom. A brief reply from Damon follows, then a brief reaction from me, then the longer reply below from Bob Slater.

Dennis Leone
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From Bob Slater, July 28, 2006

Good morning, Dennis.
Let me see if I can help with your questions.

1. Damon is correct that all rebates from AdvancePCS go directly into the Health Care Stabilization Fund (HCSF). I believe the lawsuit that you are referring to is against Merck Medco. We have not received payment of any award yet because it is being appealed, but when we do, it will go entirely into the HCSF because it is directly related to health care and improper payment of rebates.

Settlements in securities litigation, like Freddie Mac, are a little different. Assets for the pension fund and the health care fund are combined for investment purposes, so settlements or awards in securities cases go into investment income for STRS as a whole. At the end of each fiscal year, investment income is allocated between the pension fund and the health care fund, so in that way, the HCSF gets its proportionate share of securities settlements. It would not be proper accounting to put the entire settlement from these securities cases in the HCSF.

2. Damon's response is essentially correct, although the change did not occur before the HCSF was created - the current HCSF was established in 1983. "Net" is an accounting term that means combining different amounts into one figure; in this case, premiums paid by health care plan participants were deducted directly from the health care expenses paid by STRS for financial reporting purposes. As the amount of premiums became more significant, we decided that it would be better accounting to show the figures as "gross" - participant premiums would be shown as revenues or income to the HCSF, and health care costs would be shown as expenses. It is simply a matter of financial statement display - one figure or two figures. Either way, both amounts go through the HCSF. So to answer your questions, there was absolutely no effect on the health care plan participants and no difference in the balance of the Health Care Stabilization Fund.

I hope this is helpful and would be happy to discuss this further when you are here next month.

Bob Slater
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July 28, 2006; Subject: Re: Two Questions
Damon -- I do not understand your answer to my Question #2.

Dennis Leone
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From: Damon Asbury, July 27, 2006
Subject: Re: Two Questions
Dennis, with respect to your questions -

1. The rebates from Advance / Caremark did go directly into the Healthcare Stabilization fund. There are limits on which funds can go into healthcare. The limits are set by federal law - IRS I believe. So, my understanding isthat Freddie Mac or Fannie Mae would first have to go to the Pension Fundand would only be available to health care to the extent that it was notneeded for pension.

2. I believe that prior to the HCSF being established, revenues were simply netted out from health care expenses. After the fund was created. revenues were treated as a line item.

I'm going to ask Bob Slater to review these to make sure I'm giving you the correct and accurate info.

Damon
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From: Dennis Leone
To: Damon Asbury
Sent: July 27, 2006
Subject: Two Questions
Damon -- I would appreciate receiving your answers to the questions below:

1. When STRS receives a financial settlement -- like we apparently did in the lawsuit involving AdvancePCS (Merck/Medco) and like we apparently will (according to Jim Petro) from the current Freddie Mac matter -- is there some reason that the dollars we receive from such settlements cannot go straight into the Health Care Stabilization Fund? Many retirees are asking this question, especially as it pertains to the rebates handled inappropriately by AdvancePCS (which was something that was questioned early on by Warren County retiree Nancy Hamant).

2. While I suppose Board members Fisher and Ramser might have thought I was being "intrusive," I inquired at the last Board meeting about whether STRS health care premiums sent in by members were handled differently in years past with respect to the budget and revenue. I wastold no. I am trying to understand the meaning of the following statement, which appeared in the 2001 STRS Annual Report:

"Health care premiums prior to fiscal year 1997 were netted against healthcare expenses. Starting in fiscal year 1997, health care premiums were reflected as revenue."

What does the above statement mean? I am confused, in this instance, about the meaning of the terms "netted against health care expenses" and "reflected as revenue." What if the change had NOT occurred? Would it have affected the members in any way? Would it have affected the balance in the Health Care Stabilization Fund?

Thank you for your attention to these questions. Feel free to share your answers with the entire Board.

Dennis Leone